UPDATE 2-Proxy advisory firms tilt toward Airgas

* ISS advises vote against bylaw changes

* Recommends Air Products' nominees for Airgas board

* Comes after Glass Lewis advises against takeover offer

* Air Products says ISS bylaw advice a 'serious error'

* Airgas shares down 1.2 pct, Air Products up 0.5 pct (Recasts; adds dateline, byline, additional deal info)

By Ernest Scheyder

NEW YORK, Sept 9 (Reuters) - A proxy advisory firm recommended industrial gas supplier Airgas Inc's (ARG.N) shareholders to vote in favor of Air Products and Chemical's (APD.N) board nominees, a move that could bring the two rivals closer to a merger.

But the influential advisory firm Institutional Shareholder Services said shareholders should reject a bylaw change that would slate the next Airgas' annual meeting as early as January 2011. Opposition to that change could lengthen Air Products' $5.5 billion takeover effort.

The report follows risk advisory firm Glass Lewis & Co's recommendation that neither Air Products' offer nor its proposed bylaw amendments and board nominees are the best option for Airgas shareholders. [ID:nN07229323]

Air Products sweetened its all-cash offer earlier this week by 3 percent to $65.50 per share.[ID:nN06162722] Airgas shares were down 1.2 percent to $63.81 in early trading on the New York Stock Exchange.

That offer, ISS said, is a "compelling starting point for negotiation," but "remains below a fair and full price."

Air Products initially offered $60 per share in February and has increased the offer since then. If successful, Air Products would become the biggest industrial gas company in North America and would gain substantial benefits as the economy rebounds.

ISS advised Airgas shareholders to reject a change to Airgas' bylaws that would have the next annual meeting held as soon as January 2011.

"Because this proposal cedes significant control of the negotiation process to (Air Products), we believe it carries a higher price tag than simply earning a seat at the table," ISS said in its report.

However, ISS also said Airgas shareholders should support a slate of three new directors and three other minor bylaw revisions touted by Air Products.

"Support for these nominees will provide a mandate for the (Airgas) board to engage with Air Products," ISS said.

Airgas said it "respectfully disagrees" with ISS about the Air Products board nominees, and that its current board "remains unanimous in its belief" that the current $65.50 per share offer is "grossly inadequate."

For its part, Air Products said it "appreciates ISS's support" for its three nominees, but said advising shareholders not to hold another meeting in January is a "serious error."

From Air Products' perspective, the logic of the bylaw revision is that it would get de facto control of the company if its three nominees win Airgas board seats next week and another three are elected at the January meeting.

"ISS, which has no money at risk on September 15, does not appreciate the economic benefits to Airgas shareholders of our January by-law proposal," Air Products said in a statement. "It will cost Airgas shareholders money if they choose to follow ISS's misguided recommendation."

Airgas shareholders will meet next week in a Philadelphia suburb to consider the board nominees and bylaw revisions. Airgas founder and Chief Executive Officer Peter McCausland could potentially lose his seat on the board in the vote.

Air Products shares were up 42 cents at $78.21

(Reporting by Ernest Scheyder in New York and Krishna N. Das in Bangalore; Editing by Derek Caney)